Market Wrap, Tuesday, 05/13/2008

Still No Conviction

by Jim Brown

The markets continued to trade mixed on conflicting economics, plenty of
Fedspeak and $127 oil. There are plenty of news items crossing the wires but no
clear evidence of a market direction. Acquisitions, proxy battles, LBO deals and
news of further write-downs continued to confuse traders. Retail sales and home
prices continue to fall but the Fed is still positive that the economy is going
to recover. All this conflicting news is keeping traders on the sidelines as
shown by the mixed
markets.

Retail sales for April fell -0.2% but that was due mostly to plummeting auto
sales. Autos and auto parts sales fell -2.8% and that dragged down the entire
survey. Ex-autos sales were up +0.5% after gaining +0.4% in March. Where is that
consumer slowdown? The only evidence of a consumer being crushed by today's
$3.73 gasoline is the sharp drop in auto sales. Since SUV sales made a large
portion of overall vehicle sales in years past the sudden halt in SUV sales is
killing the sector.
Strangely even with higher gasoline prices sales at gas
stations declined -0.4% from March. This is the real proof that consumers are
driving less. However, compared to April 2007 they are still up +16.3% on those
higher prices. Food stores, warehouse clubs and restaurants showed strong gains
primarily due to the higher prices for food. Electronics sales rose +1.4% and
building materials dealers like Home Depot and Lowe's rose +1.9%. These numbers
are expected to get better as the
$100 billion in Federal stimulus filters
through the economy this summer.

The National Association of Realtors released their Metro Price survey today
showing median home prices declined -4.6% for the quarter and -7.7% for the last
12 months. This news should not be new for any homeowner. What is surprising is
the divergence by area with the Northeast rising +3.2% while the West fell -13%
over the same period, down -8.7% for the quarter. Of the 157 metro areas
surveyed 48 posted increases and 9 were unchanged. Home sales totaled 4.95
million units in Q1.
That was only down -1% from Q4 but -22.2% from Q1-2007.

NAR Home Sales

Wednesday's reports include the Consumer Price Index or CPI with expectations
for a rise of 0.3%. Many expect that headline number to be even higher given the
steep rise in energy prices. The EIA oil inventory report is expected to show a
gain of 2.5 million barrels but a drop in gasoline inventories of 800,000
barrels. Thursday's major report will be the Philly Fed Survey at 10:AM.

Toll Brothers issued some Q2 guidance today and CEO Robert Toll was not
encouraging. "If builders see a light at the end of the tunnel, it could be the
train coming toward you." Toll Brothers average contracted price after
cancellations hit a six-year low of $534,000. The price was hurt by higher
incentives and a change in product mix to lower priced units. Toll expects
write-downs in Q2 of $225 - $375 million to adjust the value of homes on its
books that it can no longer
sell at a profit. The second quarter backlog of
homes ordered but not delivered was cut in half to $2.08 billion. Net contracts
fell by -79% in the north, 62% in the west, 44% in the mid-Atlantic and 31% in
the south. Toll said he considered merging with another company and remains open
to the idea but "So far we are very happy with where we are." In what I believe
could be an improvement of conditions and a clue to Toll's outlook, they said
they were looking to buy land
as prices decline to levels Toll likes. Any
builder considering buying land rather than fleeing existing option contracts is
a definite improvement in my book.

Wal-Mart (WMT) reported earnings of 76 cents that beat estimates by a penny.
That was the good news. The bad news came from a cautious forecast for Q2 that
sent the stock down -1.37 on the news. CEO Lee Scott said, "There are still
uncertainties about the rest of the year. The economy is going to play a
critical factor in 2008." Scott said higher transportation costs, gasoline
prices, commodity prices and utilities remain potential headwinds for the rest
of the year. Scott
said consumers were shopping on payroll schedules with month
end buying relatively light as consumers ran out of money. He also said
consumers were spending less on credit cards. To me that suggests those cards
are already maxed out. Wal-Mart guided analysts to earnings of 78-81 cents for
the current quarter with same store sales flat to up +2%. Analysts were
expecting 81 cents. Overall sales rose to $94.1 billion for the quarter.

After the close Applied Materials (AMAT) reported earnings of 22-cents that beat
estimates by a penny. AMAT reported a drop in spending in almost every area BUT
said the semiconductor equipment industry was nearing the end of its downturn.
CEO Mike Splinter said he expected an improvement on spending in the next
quarter and revenues and orders to rise. AMAT dropped slightly on the initial
earnings news but rebounded sharply on the guidance. After the smoke cleared the
stock had returned
to about where it closed.

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Whole Foods (WFMI) reported earnings that missed the street by two cents. Shares
fell -10% in after hours after they said sales at some stores fell in Q1. WFMI
is already down -17% for the year on worries that the high priced food will have
trouble selling to a depressed consumer. Whole Foods is the Neiman Marcus
(Needless Markup) of the grocery sector. They did back their full 2008 forecast
for sales to grow 25% to 30% over 2007. Tough talk from a store under pressure.

Electronic Arts (ERTS) reported earnings excluding charges of +9 cents when
analysts were expecting only a breakeven. Sales exploded +84% to $1.13 billion
on sales of Rock Band and Burnout Paradise leading the way. Analysts had only
expected $835 million. The stock lost -$2 in after hours.

Clear Channel (CCU) continued its rally by tacking on another $1.48 after news
broke on Monday that the long running buyout might actually get done at $36.
Reportedly the parties involved have a deal in principle but the deal would
require another vote by shareholders and not close for 90 days. The original
deal was for $39.20 a share but the banks balked on the financing when the
credit crunch hit. They feared they would lose $2.7 billion if the deal
completed on the original terms.
The current agreement would avoid a long court
battle.

The biggest winner in the earnings news was Fluor (FLR) which traded up +$24.67
on earnings of $1.50 per share compared to estimates of $1.26 per share. The
company raised its full year guidance from $5.10-$5.50 to $6.25-$6.55 per share.
Revenue grew 32% and earnings +60%. Fluor said it won $5.2 billion in new
contracts. The post earnings spike sent FLR shares to $191. Before earnings when
FLR was trading around $165 we were hoping for a dip to get an entry point in
the LEAPS newsletter.
I guess I should kiss that idea goodbye.

Hewlett Packard (HPQ) shares took another 7% hit after falling -5% on Monday
when the news of the EDS acquisition hit the wires. HPQ is buying EDS for $13.9
billion. Unfortunately Hewlett's market cap has fallen by -$16 billion since the
deal was announced. That is a monster hit on analyst fears HPQ paid too much for
EDS. HPQ is paying $25 a share for EDS and that stock closed at $18.85 on
Friday. Analysts think this is a good move for HPQ and will put the company
second behind IBM
in consulting services. They just think it is too much to pay
for a company that is in turmoil with questionable management. (Their words not
mine)

HPQ Chart - Daily

Carl Icahn is reportedly loading up on Yahoo stock in preparation for an attempt
to take over the board. Icahn has reportedly acquired about 50 million shares
over the last couple weeks or a 3.6% stake. He is expected to submit an
alternate slate of directors before the deadline on Thursday. Icahn believes
there is enough shareholder hostility to get his directors elected. He then
feels he can get Microsoft back to the table and get a deal accepted. He has
plenty of help in this endeavor
with a major shareholder revolt underway after
Yahoo turned down the massive premium initially offered by Microsoft. Yahoo
shares have rebounded from $23 after Microsoft walked away last week to close at
$26.58 on news of Icahn's plan. Let's see 50 million shares at $24 and a
Microsoft offer at $33. That would be a $450 million profit. Not a bad payday if
Carl can pull it off.

Oil prices spiked again intraday as shorts in expiring futures positions were
squeezed by comments out of Iran. Iran has been having problems with its oil
sector due to lack of investment into exploration and infrastructure. Production
has been declining over recent years. Iran said today that it may consider
cutting production and that sent oil to $126.97 intraday. I have to admit that
was an excellent attempt at spin control. Production is falling for a variety of
reasons. Let's
call it a production cut instead of poor management. In later
reports Iran denied a cut was imminent but said only a reduction has been
discussed. With Iran's economy in such bad shape there is almost zero chance of
any official cut because they need all the petrodollars they can get. Helping to
drive prices higher is the expiration of June crude options on Thursday and June
crude futures next Monday. Shorts are still getting killed on every expiration
cycle.

The Dow has not cooperated in the rally this week. For 4-days now the index has
been stuck hugging support at 12800. HPQ, WMT and JPM were the three Dow
components holding the index back on Tuesday. If I were only looking at the
chart of the Dow I would be negative on the market.

DDow Chart - Daily

S&P-500 Chart - Daily

The S&P-500 is only slightly better and has been held back by continued drops in
the financial stocks. They represent 21% of the index. Oppenheimer cut estimates
on the major financial stocks again today and that weighed on the S&P but the
index still managed to hold over support at 1400.

The real excitement for me comes from the Nasdaq and Russell-2000. The Nasdaq
traded up to 2500 once again and gave back very little of its gains with a close
at 2493. The Nasdaq is quietly wedging up to that resistance at 2500 and a
breakout could be imminent. Futures are down slightly in after hours from
several tech companies reporting after the bell. Nothing critical but they are
down.

Nasdaq Chart - Daily

Russell Chart - Daily

The Russell 2000 actually broke out today with a close at 736.85. You know I
feel the Russell is the sentiment indicator for mutual funds. I reported over
the weekend that the Russell was exhibiting an unusual strength on Friday and
this week has been even stronger. With a rebound off 715 on Friday to close at
736 today that is a +21 point move at a time when the big cap indexes have been
weak. I believe this is a critical event that could be telling us the sell in
May crowd is a no
show for 2008. I can't emphasize enough that should the
Russell continue up from here we could see a major rally in our future. I have
been recommending reversing to a short bias under SPX 1400 and today's close at
1403 is marginal at best. Over 1400 we should be long and over Russell 735 that
is even a stronger signal. Get ready to back up the truck if S&P moves over 1420
and the Russell adds to its gains.